by Katie Clark and Richard Cook
2013 saw a raft of changes to UK employment law and there are likely to be more in 2014. In this Employment Alert, we recap some of the key changes that happened in 2013 and look ahead at what to expect in 2014.
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The Supreme Court of the United States recently heard arguments in its review of the U.S. Court of Appeals for the Sixth Circuit’s Quality Stores decision. At issue in Quality Stores is whether certain severance payments made to employees following an involuntary separation, but which are not linked to state unemployment benefits, are “wages” subject to Federal Insurance Contributions Act (FICA) tax. While the Supreme Court is reviewing the Quality Stores decision, there is an impending April 15, 2014, deadline for employers to file a protective refund claim for 2010 employment taxes for FICA taxes paid on severance payments.
Recent IRS guidance clarifies a number of outstanding questions regarding “in-plan conversions” of non-Roth balances to Roth balances in 401(k), 403(b) and governmental 457(b) plans. In particular, the guidance confirms that converted balances are subject to the same distribution restrictions after the conversion as they were prior to it.
A federal court recently declared unconstitutional Internal Revenue Code Section 107(2), which excludes from gross income a rental allowance paid to a “minister of the gospel” as part of his or her compensation, on the grounds that it violates the Establishment Clause of the U.S. Constitution. Religious institutions offering such allowances should closely monitor further developments in this area of the law and consider alternative compensation strategies if federal courts in their jurisdiction adopt similar holdings.
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We reported in the autumn on some small but important changes to TUPE planned to take effect in early 2014. We promised to let you know if there was any delay in the proposed implementation date of 1 January 2014. The UK Government has now confirmed that the TUPE changes will in fact take effect from 31 January 2014.
What Are The Key Changes?
A summary of the key changes can be seen in our previous alert here.
What Does This Mean For Employers?
Employers will not be able to rely on any of the new provisions for TUPE transfers occurring before 31 January 2014.
Employers who were planning on undertaking a TUPE transfer on or shortly after 1 January 2014, with a view to relying on some or all of the new provisions, may now, if possible, wish to consider delaying that transfer until the changes take effect on 31 January 2014.
This consideration is particularly relevant for any employers who may be running simultaneous pre-transfer redundancy and TUPE consultations, together with those employers looking to relocate the transferring workforce to existing premises post-transfer.
For more information, or to discuss the impact of the changes to TUPE or the revised implementation date on your business, please contact Katie Clark or any other member of the McDermott employment team in London.
A District Court in Eastern Michigan recently rejected a motion to dismiss a participant’s benefit claim, holding that an employer legally could be liable to a participant in a nonqualified deferred compensation plan when the employer did not properly withhold FICA tax in the manner most advantageous to the participant. As a best practice, plan administrators should scrutinize any participant communications or claim responses because they can open the door to estoppel claims under ERISA.
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The California state legislature recently enacted a law that may affect the taxation of benefits an employer provides to same-sex domestic partners in the state. California AB 362 excludes from gross income for California state income tax purposes the amount of any tax gross-ups paid by an employer to an employee for benefits for that employee’s same-sex spouse or domestic partner. The law was approved by California’s governor on October 1, 2013, and is effective immediately through January 1, 2019.
Earlier this year the Supreme Court of the United States ruled in U.S. v. Windsor that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional (see “Supreme Court Rules on DOMA and California’s Proposition 8” for more). Section 3 of DOMA had provided that, for purposes of all federal laws, the word “marriage” means “only a legal union between one man and one woman as husband and wife,” and the word “spouse” refers “only to a person of the opposite-sex who is a husband or wife.” Subsequent Internal Revenue Service (IRS) and U.S. Department of Labor guidance clarified that, as a result of Windsor, favorable federal tax treatment of spousal benefit coverage would extend to all same-sex couples legally married in any jurisdiction with laws authorizing same-sex marriage, regardless of whether the couple currently resides in a state where same-sex marriage is recognized (see “IRS and DOL Guidance Clarifies Employee Benefits Impact of Supreme Court’s DOMA Ruling” for more information).
As a result of Windsor and the subsequent IRS guidance, the impact of California AB 362 appears fairly limited. Pre-Windsor, some employers provided a federal tax gross-up on the imputed value of coverage provided to an employee’s same-sex spouse or domestic partner. Post-Windsor, same-sex married couples in California no longer need a tax gross-up for either state or federal tax purposes because they no longer have to be taxed on the value of the coverage provided to their spouse. Because of this treatment, application of California AB 362 would be limited to a situation where an employer provides a federal tax gross-up to an employee who is in a California-registered domestic partnership. Such a gross-up, which would have been taxable under prior state law, is now no longer taxable in California. Employers in California will need to update their payroll and tax procedures accordingly. Employers both inside and outside of California that previously provided tax gross-ups may find it desirable to revisit their gross-up policies in light of the Windsor decision and the IRS guidance.
Employers extending benefit coverage to employees’ same-sex spouses and partners should review their payroll procedures to ensure that such coverages are properly taxed for federal income and FICA tax purposes. Employers also should review the options in Notice 2013-61 and consider filing claims for refunds or adjustments of FICA overpayments.
To read the full article, click here.
The UK Employment Appeal Tribunal (the EAT) recently published its judgment in litigation that resulted from the 2008 closure of Woolworths. It confirms initial reports of a significant change to the law on UK collective redundancy consultation.
Background
When a UK employer proposes to dismiss as redundant 20 or more employees, within a period of 90 days or less, it is required to collectively consult representatives of those affected, prior to implementing its proposal. Failure to do so can lead to the employer being required to pay up to 90 days’ pay to each affected employee (a Protective Award).
This obligation arises out of the European Collective Redundancies Directive (the Directive). In implementing the Directive, the UK Government stipulated that the obligation would only be triggered if the proposed redundancies involved 20 or more employees who all worked “at one establishment” within the employer’s organization. UK employers have therefore relied on this for many years as a means of avoiding the obligation to collectively consult when redundancies are proposed across different locations or are otherwise proposed at different “establishments”.
What Has Changed?
The EAT has now held that the words “at one establishment” should be deleted from UK legislation. Why? Because the stated purpose of the Directive is to provide greater protection for workers facing a collective redundancy situation and, in the view of the EAT, without this deletion, UK legislation provides less protection than the Directive requires.
What Does This Mean for UK Employers?
Employers wishing to avoid liability for a Protective Award should now collectively consult when they are proposing to dismiss 20 or more employees as redundant, anywhere in their UK business, within a period of 90 days or less.
Employers will no longer be able to “slice and dice” their UK business into different establishments in order lawfully to avoid the obligation to collectively consult about proposed redundancies.
This marks a significant change to UK collective redundancy practice.
Large employers will be particularly affected, as the obligation to collectively consult will now be triggered even when headcount reductions are proposed independently, by unrelated business units, located across multiple sites. Employers will encounter an inevitable increase in the administrative burden they have to shoulder, not only because of a rise in the number of collective consultation exercises required, but also because of the degree of organization and communication that will in future be necessary to keep track of, and aggregate, disparate redundancy proposals.
Employers should not despair however. The collective redundancy regime remains otherwise unchanged and, whilst employers will now find themselves required to collectively consult more frequently, this judgment does not require collective consultation to take place en masse at one geographic location. Collective consultation exercises can still take place at different establishments if that is a more commercially sensible option. It is worth noting that this change will apply to redundancies that have already been proposed and to those that are on-going.
Please contact your usual McDermott lawyer or Sharon Tan if you would like [...]
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Many employers have begun the process of evaluating their options and obligations with respect to extending benefit coverage under employer-sponsored benefit plans to same-sex spouses in light of the U.S. Supreme Court’s recent ruling on Section 3 of the Defense of Marriage Act. Section 3 of DOMA provided that for all purposes of federal law the word “marriage” meant “only a legal union between one man and one woman as husband and wife,” and the word “spouse” referred “only to a person of the opposite-sex who is a husband or wife.” In June 2013, the Supreme Court ruled in United States v. Windsor that Section 3 of DOMA was an unconstitutional “deprivation of the liberty of the person protected by the Fifth Amendment.” The effect of this ruling is that federal law now generally will defer to state law definitions of marriage, including same-sex marriage, which has been legalized in 13 states and the District of Columbia.
As part of evaluating options for extending benefit coverage to same-sex spouses, employers need to consider the financial implications of such benefits. These implications include costs the employer will incur in extending such benefits, as well as the financial impact on employees who opt to utilize such benefits. Many of these costs are dependent upon the spousal benefits the employer currently offers, although the relevant considerations and cost estimates outlined below may be helpful resources.
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